Project Bank Accounts in construction contracts: to implement or not?

There has been much commentary and debate in the construction industry recently regarding introduction of project bank accounts (PBAs) and the Scottish Government issued an updated construction policy note (CPN1/2019) on this topic in February.

The revised policy came into effect on 19 March 2019. For any project valued at £2 million or more (£5 million+ for civil engineering works) commencing procurement after that date, the use of PBAs will be mandatory where the procuring authority is a Scottish Government body.

Local authorities are not compelled to use PBAs but the updated guide “Implementing Project Bank Accounts in Construction Contracts” published at the same time as CPN1/2019 contains a clear request from Scottish Government that they be implemented by other public bodies.

Why is pressure being applied for public sector bodies to adopt PBAs?

Adopting PBAs is identified as having three admirable and highly desirable objectives:

• achieving faster payments for sub-contractors (and those further down the supply chain), improving cash flow to what are frequently small and medium sized businesses and helping to keep them solvent and viable;
• reducing the risk that sub-contractors will not be paid in cases of main contractor insolvency (also protecting the Employer if a replacement contractor has to be appointed after insolvency); and
• assisting the public body to discharge its duties under section 15(5)(d) of the Procurement Reform (Scotland) Act 2014 (commitment to 30-day payment terms).

What is involved in PBA arrangements?

• Establishment of a deed of trust, with the Employer and the Contractor as original parties and Trustees and to which sub-contractors can “sign-up” as beneficiaries during the period while the works are being cariied out via an additional party agreement.
• A bank account opened in the joint names of the Employer and Contractor, into which payments of amounts to be included in interim certificates issued under the construction contract are paid by the Employer (instead of being made directly to the Contractor) and from which payments can be allocated simultaneously among the named beneficiaries under the deed of trust.
• Amendments to the payment arrangements under the construction contract requiring:
  – the Contractor to provide more detail regarding sums due to sub-contractors who are named beneficiaries under the deed of trust when applying for interim payments;
  – faster payment (into the PBA) by Employer after receipt of invoices; and
  – fast payments to sub-contractors who are named beneficiaries to the deed of trust.

What are the challenges?

No one can fault the good intentions behind PBAs but their proposed introduction has been met with resistance within the construction sector. The reasons cited include:

• Increased contract administration – in particular the requirement for the Contractor to provide details of payments due to sub-contractors included in applications for payment submitted under the main contract. This information requires to be broken down so as to show amounts due to each named beneficiary under the deed of trust (which may include sub-sub-contractors) and to be released to those parties from the PBA once payment is made by the Employer.
• The increased level of detail to be submitted in application for payments under the main contracts may result in it taking longer to prepare these, which may have the unintended effect of slowing down rather than speeding up payments.
• The purpose of establishing a deed of trust is to ensure the status of funds held in the PBA and intended to be transferred to sub-contractors will not be affected by any main contractor insolvency (i.e. to defeat any claim for payment of those sums made by any liquidator of the main contractor). This, combined with the amendments made to construction contracts providing for payments going into the PBA rather than to the Contractor directly, has led to concerns that the Contractor will not be able to record the full value of the Contract Sum as turnover in its statutory accounts. Guidance published by SG suggests that this should not be the case, but the industry remains nervous over this issue.

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Harper Macleod LLP is at the forefront of considering the use of PBAs and it will be very interesting to see the extent and speed of take up of these arrangements.